goldenhinde

Rare Market Indicator Sighting: T2108 Over 90%

Good article - thought and full of data rather than some of the ususal down in the dumps commentary one finds in SA articles.

It seems to me that the landmines left in the field notwithstanding the real issue becomes not one of recovery - but WHAT TYPE of recovery. If the recovery is broad based then Mr. Market will respond in accordance with the commitment of capital on a more classic asset allocation basis. If the recovery is more methodical and slow i.e., GDP growth in 2010 is only 1% then stock picking skills will prevail over asset allocation strategies.

It seems to me that identifying those companies that are not drowning in debt, not relying on a balance sheet filled with good will, not holding on to bloated inventories (like tech companies often do), generating sufficient cash flow to handle their current obligations will come out of this well.

GE is an interesting play in this regard. According to an article in Business Week on GE, the stock is being valued on the basis of all of its industrial businesses. GE Capital is valued at next to nothing. On the one hand they have $45 billion in cash. On the other hand 40% of their consumer loans at the Capital division are of sub prime quality.

If the recovery is long and drawn out I cannot see how a classic asset allocation approach is worth the risk. The upside does not seem to balance the downside risk.